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Daily Newsletter, Tuesday, 04/23/2002

HAVING TROUBLE PRINTING?

The Option Investor Newsletter Tuesday 04-23-2002
Copyright 2001, All rights reserved. 1 of 3
Redistribution in any form strictly prohibited.
Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP (view in courier font for table alignment)
************************************************************
04-23-2002 High Low Volume Advance/Decline
DJIA 10089.24 - 47.19 10177.13 10069.46 1.32 bln 1566/1588
NASDAQ 1730.29 - 28.39 1762.94 1723.93 1.74 bln 1633/1902
S&P 100 545.80 - 4.24 551.86 544.44 Totals 3199/3491
S&P 500 1100.96 - 6.87 1111.17 1098.94
RUS 2000 510.29 - 0.64 512.06 509.53
DJ TRANS 2698.05 - 25.17 2723.32 2689.49
VIX 22.24 + 0.52 22.28 20.85
VXN 39.93 + 0.87 39.97 37.71
TRIN 1.17
PUT/CALL 0.69
************************************************************
Time For A Bounce?
No, I have not lost my mind. At least not yet! With all the
major indexes apparently headed for lower levels most investors
are probably thinking about hedging their positions by purchasing
some puts. However, as evidenced by the VIX they have not turned
those thoughts into action just yet. Actually even though the
markets appear on the surface to be heading south the internals
are still showing that resilience I previously wrote about. If
that resilience is going to show tangible results it may happen
on Wednesday.
Weak results from Exxon Mobil and Dupont followed up on the damage
done yesterday by Ericsson, The earnings parade continued but hopes
for news of a quick economic recovery dimmed. The majority of
companies are hitting their estimates but the guidance remains
cautious. Continued comments about the bottom being behind us has
lost interest because there are no comments about good times
being ahead of us. It is one thing to believe in the bottom but
investors want to buy rising corporate profits with a robust
heartbeat not a flat line EKG.
With the earnings excitement waning investors focused on the news
of the day which was mostly court related. Microsoft suffered
through another day of Bill Gates on the witness stand and the
heated exchange of questions and sparing by attorneys. Gates
conceded that Sun Microsystems Java programming language and
Netscape Navigator had the potential to become software platforms
that could compete with Windows. I bet he choked on that sentence.
By conceding that point he could have jeopardized one of the defense
points that those platforms never posed a threat to Microsoft and
therefore it was inappropriate to impose sanctions. The hearings
on possible remedies in the case are expected to continue through
May. MSFT broke under the recent low of $54.26 and closed at a
level not seen since October of 53.99.
Hewlett Packard CEO, Carly Fiorina, also in court, testified about
the Compaq merger. She denied that HWP deceived shareholders about
the prospects of the merger and said they did not bully big investors
to vote for the transaction. She was questioned about entries in a
personal diary that showed HP executives thought the merger would
work out much worse than the public announcements. The opposition
produced internal memos that showed the deal could reduce HWP earnings
by as much as -10% instead of boosting them +12% as the company
claimed in SEC filings. The company even maintained charts that
showed the gaps in revenue between actual and what was promised to
investors. If the court allows the merger vote to stand then the
companies will combine on May-7th. The opposition hopes to throw out
the vote or at lease some of the votes as being unduly influenced.
Worldcom took another beating today when its debt was downgraded
again. The stock closed at $3.43 on volume of 256 million shares.
WCOM announced that Ebbers owed the company over $300 million for
covering his margin calls. Time to have a garage sale Bernie?
The entire sector is so ugly that if the adage of "buy stocks
when nobody wants them" is true then this is a blue light special
of monster proportions.
Surprise, surprise, surprise! Amazon beat the street and posted a
smaller 1Q loss than expected and raised guidance. The company
said it posted a .06 loss compared to estimates of a .09 cent
loss. They said sales rose by 21% but the company fell back into
the red due to seasonal shopping patterns. The company said it
was ahead of schedule financially and they would cut prices of
books to stimulate sales. They feel they can cut prices and still
produce a full year profit of more than $100 million. At that rate
it would take them more than 30 years to pay off their debt but
who is counting.
With the Nasdaq falling for the last five sessions and the Dow
and S&P closing right at support could there be a bounce in our
future? Never can tell but if it is going to happen it should
happen tomorrow. Why? Because if it doesn't the down trend continues
we will fall below serious support and the result will not be pretty.
For the Dow the 10100 area has been support for two weeks and the
Dow closed slightly below it on Tuesday. Not a good sign. The S&P
has had support in the 1100-1105 range for two weeks and a close
below that would put us back to February levels. It closed today
at 1100.42. Can you say "teetering on the brink?" The April low
for the Nasdaq was 1724 back on April 11th. It closed at 1730 but
the intraday low was 1723.93. As you can see from the numbers above
there is no room for error. With a mere handful of points separating
us from freefall traders should be scared. They are not, period.
Complacency is still king and decliners only beat advancers by 22
issues on the NYSE. (1588/1566) The Nasdaq was a little worse at
1902/1633 but as you can see there is no rush to the exits.
The resilience factor. All month the market has taken some serious
hits and failed to give up. The bulls simply refuse to turn lose
and continue to buy the dips. Tomorrow the Nasdaq could see a bounce
at the open from the Amazon earnings but it is not likely to last.
Stocks soared on optimism from mid-February to early March and they
are now falling on reality as lack of positive guidance takes its
toll. Should the indexes fall through support this week there are
probably buy programs at Dow 10,000, Nasdaq 1725 and S&P 1100.
Those buy programs, depending on the number and strength, could
cause some short covering and a minor bounce. Unfortunately it
will just be a bounce. For those traders who have been trading the
ranges this will be another opportunity to sell the rally. My entry
points for going short on a breakdown are still 10000/1725/1100.
If today's trading was any indication that opportunity could come
really soon. Next support on the S&P is in the 1080 range and 1700
for the Nasdaq. As you can see those are fairly close. The Dow
however does not have significant support until 9750-9825 which
could means a significant breakdown in investor sentiment. We are
now eight days into the spring crash season and the ride ahead is
looking a little bumpy. Buckle that seatbelt!
Enter Very Passively, Exit Aggressively!
Jim Brown
Editor
********************
INDEX TRADER SUMMARY
********************
KEY FEBRUARY LOWS COME INTO VIEW
by Leigh Stevens
OUTLOOK -
I continue to think the Market is in a basing process, but today's
action suggests that we need to gauge the low end of the possible
broad trading range for the market based on the S&P 500 and Dow
Jones Industrial lows of February - at 1080 and in the 9600 area,
respectively. This, rather than use the narrower S&P 100 or the
even still weak Nasdaq (either the Composite or Nasdaq 100) to set
estimates for the low end of a possible range.
If the market is in a broad trading range and is basing, what
would cause the market to rally from 1080 on SPX and 9600 in the
Dow, if reached? The only thing will be an improving earnings
trend, both in the next 1-2 quarters' numbers, but in the
perception of an upward trend in earnings ahead. If there was a
break of the February closing lows of 1080 in the S&P, 9620 in the
Dow, I think it would shock investors and actually could delay the
economic recovery.
TODAY'S ACTION -
OEX made a new closing low but is still in the same area as its
earlier bottom. Amazon's earnings rebound may catalyze a rally
tomorrow -- with OEX dropping to new lows later on. The Nasdaq
Composite has not taken out 1700, which would equal its Feb.
intraday low, but it looks increasingly vulnerable to do that.
Nasdaq 100 has taken out its Feb. low on both a closing and
intraday basis, as did QQQ, but the Q's only equaled its prior
closing low of earlier this month (4/11). So, like that picture of
the cat hanging on the bar with a "hang in there, baby", the
indices are within a hair's breath of going into some further free
fall.
If we get a rebound from today's lows, if these possible double
bottoms encourage the bulls along with the oversold hourly
oscillators, it may be worth playing on a short-term basis.
However, the daily 14-day stochastics are still showing downward
momentum, so I won't suggest stepping up to the plate unless you
are there to watch market action. Those who have other jobs and
lives to lead, can wait -- hold puts, if you have them, look to
buy puts on any rally that does develop. The levels to SHORT at
look to continue to be more predictable in a bear trend.
I have been suggesting trading the ranges, and that has been
working fairly well. Along with price considerations, the
stochastic oscillators have been useful, but not indispensable.
They have been tending to reverse from overbought extremes very
readily, so when this has occurred from an area of resistance, the
short side as been easier to trade.
We are mixed on the oscillators and mixed on price support ideas,
so watchful care is needed on trading a short-term (1-2 day)
bounce, which I think could come tomorrow if Amazon earnings and
good economic reports supply a spark.
Since I try to anticipate levels to trade index options ahead of
time, projections off the hourly charts has been working pretty
well and use of the hourly stochastic oscillator with length at 21
has been working.
Taking out prior lows, as occurred today, could not be anticipated
in day-to-day commentary, especially given the short-term oversold
condition. Still, here's what I can see tonight, for Wed. and
beyond.
THE CHART PARADE -
S&P 500 (SPX):
Daily momentum is down based on 14-day stochastics but hourly
model here is oversold. If long SPX calls based on my suggestion
of support developing in 1100 area, hold and play a possible
bounce next 1-2 days, but look to reverse to short if near
Resistance (R) keeps a lid on any rally and/or this stochastic
again gets up toward overbought. 1080 is main support. If holding
puts for a longer play, 1080 is a major objective currently.
S&P 100 (OEX) hourly chart:
Last night's question on the OEX was whether it would slip under
potential support at 545-547 even though oversold? YES! More major
support, at low end of hourly downtrend channel, now comes looks
to be 534.
For those who may have taken a short-term call play, thinking the
prior lows were holding -- we may still get a rebound here in a
bear fake out. Stay tuned. However, even a move above near
resistance in the 550 area would only be short-term bullish. I
think you take out new put positions when the hourly oscillator
gets to an overbought area again, say at 555 if reached.
Dow (DJX) chart:
DJX has been the last Index to get oversold again short-term.
Near support still looks like 100.5-100,8. I was suggesting last
night that this was the area to buy calls again and take some
profits on puts and this strategy may still have promise, but it
looks to be playable only for those who can watch the market
pretty closely.
A move below 100 puts DJX into a new down leg. 99 is the next
support below this perceived technical support. I don't perceive
it as so significant but the institutions and the public do. The
102 area offers resistance and a likely new shorting opportunity
as this Index still has MO (momentum) to the downside.
QQQ:
33.00 is still hanging in there as possible support. If long the
stock or calls in this area, don't risk much, as the next
technical support implied by low end of hourly downtrend channel
appears well lower, down around 31. QQQ needs to get above 34 to
get some MO going on the upside. I doubt that the Q's are going
to get through 35-35.50 anytime soon, so this is the high-
potential next new put play, especially if we see the stochastic
up toward its overbought zone again.
Long/Call Positions:
Long QQQ at 34.30
Stop: 32.50.
Objective: 38.00
I will let my stop take me out or will exit on a rebound and wait
to see what develops before trying to "position" on the long side
given the continued weakness.
Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com
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****************
MARKET SENTIMENT
****************
Why Aren't Investors Scared?
By Eric Utley
I can't figure out why the CBOE Market Volatility Index (VIX.X)
is trading where it is, especially after Tuesday's close. The
same question can be asked of the Nasdaq-100 Volatility Index
(VXN.X). I've read half a dozen explanations for why the VIX.X
is trading low, arguments for why this time is "different."
Arguments for why the low VIX.X isn't flashing warning signs.
I think that the VIX is, in fact, flashing warning signs. My
opinion was strengthened after Tuesday's close. In scanning
the major market averages, it's pretty easy to see that the
"Big Three" are sitting right on top of important support
levels. For the Dow, that's 10,000. The S&P at 1100. And the
Nasdaq-100 at its February low, previously thought to be a
double bottom.
With the three looking like they're going to breakdown, and
no major put buying (Read: Higher VIX.X) to accompany that
threat, I think it's almost a given that they breakdown. As
noted below, the VIX is lower now than it was in early February,
when the OEX was trading near what turned out to be a relative
low; the OEX closed there today.
The only major conflicting metric that I can find is the
Nasdaq-100 Bullish Percent, which flipped to bull confirmed
last week. That flip hasn't done much to help traders this
week, as the NDX is lower by about 4.5 percent since
reversing into bull confirmed. A breakdown below the NDX's
immediate support level should result in another reversal in
the bullish percent, back into a defensive market stance.
Of course the major market averages might not breakdown, in
which case investors are correct in not buying puts, thereby
driving the VIX higher by a substantial amount. In any case,
we should know more in the days to come. It should be an
interesting week from here.
-----------------------------------------------------------------
Market Averages
DJIA ($INDU)
52-week High: 11350
52-week Low : 8062
Current : 10089
Moving Averages:
(Simple)
10-dma: 10205
50-dma: 10271
200-dma: 9941
S&P 500 ($SPX)
52-week High: 1316
52-week Low : 945
Current : 1101
Moving Averages:
(Simple)
10-dma: 1116
50-dma: 1130
200-dma: 1132
Nasdaq-100 ($NDX)
52-week High: 2071
52-week Low : 1089
Current : 1323
Moving Averages:
(Simple)
10-dma: 1367
50-dma: 1431
200-dma: 1502
Oil Service ($OSX)
The OSX was the day's best performing sector during Tuesday's
session. The index finished 1.91 percent higher on the day.
Crude for June delivery was about 20 cents higher on the day.
Further fears of escalating Middle East tensions kept the
shorts fearful, and the buyers confident.
Sector leaders included Transocean (NYSE:RIG), Nabors (NYSE:NBR),
Cooper Cameron (NYSE:CAM), Varco (NYSE:VRC), and Tidewater
(NYSE:TDW).
52-week High: 136
52-week Low : 58
Current : 105
Moving Averages:
(Simple)
10-dma: 100
50-dma: 97
200-dma: 85
Internet ($INX)
The INX was the worst performing sector Tuesday. The index shed
4.89 percent for the day. Earthlink's (NASDAQ:ELNK) blow up
pressured the group.
Sector losers included Earthlink, Inktomi (NASDAQ:INKT),
Ticketmaster (NASDAQ:TMCS), CMGI (NASDAQ:CMGI), Cisco Systems
(NASDAQ:CSCO), Juniper Networks (NASDAQ:JNPR), and Expedia
(NASDAQ:EXPE).
52-week High: 243
52-week Low : 76
Current : 95
Moving Averages:
(Simple)
10-dma: 102
50-dma: 113
200-dma: 125
-----------------------------------------------------------------
Market Volatility
The VIX finished higher for the second consecutive session, but
still isn't revealing much in the way of fear. Think of it this
way: The OEX is threatening to breakdown below its early February
lows; the VIX was trading above 25 in early February.
The VXN finished fractionally higher Tuesday, but still below the
40 level. There's something magical about 40, but I haven't
figured it out yet.
CBOE Market Volatility Index (VIX) - 22.24 +0.52
Nasdaq-100 Volatility Index (VXN) - 39.45 +0.39
-----------------------------------------------------------------
Put/Call Ratio Call Volume Put Volume
Total 0.69 551,059 382,091
Equity Only 0.61 487,654 297,222
OEX 1.50 10,522 15,754
QQQ 0.59 34,682 20,380
-----------------------------------------------------------------
Bullish Percent Data
Current Change Status
NYSE 65 + 0 Bull Confirmed
NASDAQ-100 42 - 2 Bull Confirmed
DOW 53 + 0 Bear Alert
S&P 500 68 - 1 Bull Correction
S&P 100 63 - 1 Bear Alert
Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart. Readings above 70 are considered overbought, and readings
below 30 are considered oversold.
Bull Confirmed - Aggressively long
Bull Alert - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert - Take defensive action if long
Bear Confirmed - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend
-----------------------------------------------------------------
5-Day Arms Index 1.27
10-Day Arms Index 1.34
21-Day Arms Index 1.36
55-Day Arms Index 1.23
Extreme readings above 1.5 are bullish, and readings below .85
are bearish. These signals don't occur often and tend be early,
but when the do, they can signal significant market turning
points.
-----------------------------------------------------------------
Market Internals
Advancers Decliners
NYSE 1573 1602
NASDAQ 1626 1899
New Highs New Lows
NYSE 162 36
NASDAQ 164 63
Volume (in millions)
NYSE 1,312
NASDAQ 1,959
-----------------------------------------------------------------
Commitments Of Traders Report: 04/16/02
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.
Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.
S&P 500
The spread between S&P commercials and small traders narrowed
during the most recent reporting period. Commercials added a
few more longs than shorts, resulting in a small reduction in the
group's net bearish position. Meanwhile, small traders added
quite a few short positions, coming off of the group's yearly
high in bullishness.
Commercials Long Short Net % Of OI
04/02/02 313,294 406,337 (93,403) (13.0%)
04/09/02 320,101 411,075 (90,974) (12.4%)
04/16/02 322,578 411,245 (88,667) (12.1%)
Most bearish reading of the year: (111,956) - 3/6/01
Most bullish reading of the year: ( 36,481) - 10/16/01
Small Traders Long Short Net % of OI
04/02/02 149,449 43,139 106,310 55.2%
04/09/02 151,237 47,678 103,559 52.1%
04/16/02 150,529 50,424 100,105 49.8%
Most bearish reading of the year: 36,513 - 5/01/01
Most bullish reading of the year: 107,702 - 3/26/02
NASDAQ-100
Nasdaq commercials grew less bearish during the most recent
reporting period. The group added a number of long positions,
while maintaining last week's short position. Net, however, the
group is still bearish. Small traders went in the opposite
direction by adding more shorts than longs, for a decrease in
the group's net bullish position.
Commercials Long Short Net % of OI
04/02/02 26,211 31,840 (5,629) (9.7%)
04/09/02 28,985 35,221 (6,236) (9.7%)
04/16/02 32,024 35,723 (3,699) (5.5%)
Most bearish reading of the year: (15,521) - 3/13/01
Most bullish reading of the year: 7,774 - 12/21/01
Small Traders Long Short Net % of OI
04/02/02 10,615 7,769 2,846 15.5%
04/09/02 11,640 8,353 3,287 16.4%
04/16/02 12,458 10,572 1,878 8.2%
Most bearish reading of the year: (9,877) - 12/21/01
Most bullish reading of the year: 8,460 - 3/13/01
DOW JONES INDUSTRIAL
Dow commercials grew less bullish during the most recent reporting
period by reducing their number of longs and increasing their
number of shorts. The group's net bullish position dropped by
about 1,100 contracts. Small traders added slightly more longs
than shorts for a reduction in the group's net bearish position.
Commercials Long Short Net % of OI
04/02/02 18,717 12,549 6,168 19.7%
04/09/02 19,393 13,445 5,948 16.7%
04/16/02 19,080 14,267 4,813 14.4%
Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year: 15,135 - 10/16/01
Small Traders Long Short Net % of OI
04/02/02 5,192 9,007 (3,815) (26.9%)
04/09/02 5,459 9,340 (3,881) (26.2%)
04/16/02 5,644 9,448 (3,804) (25.2%)
Most bearish reading of the year: (8,777) - 10/12/01
Most bullish reading of the year: 1,909 - 1/16/01
-----------------------------------------------------------------
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***********************
INDEX TRADER GAME PLANS
***********************
THE SECTOR BEAT - 4/23
by Leigh Stevens
NEW TRADE PLAYS and GUIDELINES:
Property causality stocks, like Chubb (CB), St. Paul Cos. (SPC),
both trading sideways since beginning of 2001, look like
favorable call plays, on pullbacks. There is not a specific
separate sector for this group that is widely followed, but these
companies are part of the NYSE financial index ($NF.X). NF
continues to consolidate and looks poised for a further move up.
When the market gets to a tradable bottom, I will suggest calls
on CB and SPX as one way to play strength in the financial, as
they should, at that juncture, have excellent upside potential.
When a sector does not decline, or goes up, when most stocks are
declining, it is showing good relative strength.
CHUBB CORP DAILY CHART:
ST. PAUL COS. DAILY CHART:
>> DRG, the Pharmaceutical sector index ($DRG.X), (4/22).
Rebounding from low end of a probable trading range and oversold.
This sector is playable by the purchase of the May 60 Merck (MRK
EL) calls, a prominent stock in this sector, especially on a
pullback in the stock to the 54 area -- 4/23 close: 55.49.
May 60 calls closed at .10 -- The May 55 calls, at 1.50; 4/23.
LONG/CALL TRADES, PREVIOUSLY RECOMMENDED:
>> Internet Sector index ($INX.X) - 4/17 Sector Trader suggestion:
OPTION play: $INX sector stock, JNPR (Juniper Networks)
Buying the May 15 Call (JUX EC) at 4/18 opening was suggested.
4/18 open: .35; JNPR objective: to $18
JNPR has been declining recently, along with tech stocks in
general. Suggest staying with the calls already purchased as
long as the stock does not retreat much below its trendline,
which, on a closing basis, is intersects in the 10.30-10.50 area.
>> Telecom ($XTC.X) index - 4/15 suggestion:
OPTION play: Sector stock, Level 3 Communications (LVLT)-
1)June 5 Call (HGY FA) suggested: 4/16 open: .60
2)LVLT outright purchase, with stock under $5, also suggested:
4/6 open: 4.16; Objective on LVLT stock: to 5.5/6.
The Telecom sector sold off in past two days, but prior lows have
not been exceeded at this point. Stock chosen to play in this
sector is holding up OK, so will wait and see how the stock
(Level 3 - LVLT) continues to trade.
>> Semiconductor Index ($SOX.X) - 4/15 Sector Trader suggestion:
May 650 calls suggested -- at 2.35 on 4/23 close, these calls
have come down to a more attractive level, assuming SOX holds it
prior recent low in 545-548 area -- still think the SOX sector is
a play for a rebound in next 3-4 weeks, if index can hold these
prior lows. Otherwise, I will exit.
>> Cyclical sector ($CYC.X) - 4/15 suggestion:
1.) iShares Cyclical Trust (IYC) - 4/16 open: 56.95
Objective: new high above 63.00
2.) OPTION play: CYC Sector stock, - Alcoa (AA)
May 40 calls (AA EH) - 4/16 open: .60
Note: Holding any existing calls only, as stock has broken technical support.
>> Airline sector ($XAL.X) - 4/15 Sector Trader suggestion:
OPTION PLAY: XAL sector stock Southwest Airlines (LUV)
Sept. 20 (LUV ID) call suggested - 4/16 open: 1.25
OBJECTIVE: $22 near-term in the stock; $24, longer-term.
LUV is hold technical support, but just. Retreat in the stock to
BELOW 17.25, on a closing basis, would cause me to exit calls.
>> Utilities Index - Holders trust shares (AMEX: UTH)
Long at 95.25
Stop: 91.00; Longer-term objective: 105
OPEN SHORTS/PUT PLAYS:
>> RTH (AMEX: Retail sector trust stock)
SHORT at 99.00
Objective: 90; Stop: 102
LIQUIDATIONS:
>> XAU (PHLX Gold & Silver Index)
Reiterated purchase of the May 65 puts; 4/19
STOP: Exit puts if XAU moves to new closing high above 72.33
BASED ON SUGGESTED STOP, PUTS WERE CLOSED OUT ON THE 4/23 OPEN
NOTE: RISK to REWARD guidelines -
Determining an objective is important, even if it is a moving
target, as this is the reward potential. Determining reward
potential is critical to establishing whether a stop that makes
“sense” (e.g., a sell stop that was placed under a key support
level) would, if triggered, result in a dollar loss that is in
proportion to profit potential; e.g., 1/3 of it. (On occasion,
when the purchase price of call or put is equal to 1/3 or less of
the estimated reward potential, there may not be a specific exit
suggestion, as the cost of the option is equal to the amount that
is being risked.)
Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com
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**********
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The Option Investor Newsletter Tuesday 04-23-2002
Copyright 2001, All rights reserved. 2 of 3
Redistribution in any form strictly prohibited.
****************
PICKS WE DROPPED
****************
When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.
CALLS:
*****
TMX $38.39 -0.16 (-0.51) The sentiment quickly turned in the
telecom sector after WCOM warned again. The broader sector
selling pressured TMX lower. Despite the stock's impressive
relative strength, it looks poised to breakdown. We're taking
the cautious stance, and dropping coverage ahead of potential
further weakness. Look to exit open plays on strength early
in tomorrow's session.
RYL $107.90 +4.26 (+8.40) With the breakout in the Housing sector
following more stellar earnings, our RYL play has performed
beautifully, especially after the breakout over $102.50 on
Monday. After such a sharp rally (8.4% in 2 days), we would be
looking to book gains anyways, but with the company due to report
its own earnings tomorrow after the closing bell, we'll take this
opportunity to exit on strength. RYL deserves a rest and moves
to the drop list this evening. Take advantage of a continuation
of the rally in the morning to gain a more favorable exit.
PUTS:
*****
OVER $23.99 -0.83 (-0.01) OVER rolled over again today
after trying to rally above the $25 mark. Its sector, the
Internet Sector Index (INX.X), broke down in a big way
today. The fact that OVER was able to hold up in light of
the breakdown in its sector has us worried. Instead of
putting ourselves at risk of a short covering rally, we're
looking to drop open positions on weakness in tomorrow's
session.
BGEN $41.54 -0.36 (-1.96) Short and sweet, our BGEN play didn't
waste any time moving in our favor. Unfortunately, most of the
price decline came in the opening hour on Monday and there wasn't
much left to capture after the initial drop. With the Biotech
index still weakening and the stock trading at a fresh 3-year
low, it looks like there could still be some more downside in the
play. But earnings are slated to come out tomorrow morning,
prudent investors will already have any open positions closed.
For those intrepid souls that held over the announcement, look
to harvest those gains on any sort of opening drop in the
morning.
***********************************************************
DAILY RESULTS
***********************************************************
Please view this in COURIER 10 font for alignment
*************************************************
CALLS Mon Tue
AZO 75.14 0.16 0.40 Sideways since breakout, next leg??
TKTX 41.40 0.97 -0.45 Very strong versus broader biotech
RYL 107.90 4.14 4.26 Dropped, earnings, very nice move
PNRA 68.61 0.26 1.61 Defensive buyers coming back in
TMX 38.39 -0.35 -0.16 Dropped, telecom woes weigh it down
AET 43.45 0.09 -1.06 Profit taking pullback, entry point
HI 61.80 -1.54 0.90 Trending higher, still very strong
ACDO 61.97 -0.49 -0.32 Tight trading range, profit taking
PUTS
OVER 23.99 0.82 -0.83 Dropped, gaining relative strength
JDEC 11.90 -0.32 0.06 Consolidating, ready to breakdown
MU 29.39 1.40 -1.51 Hynix acquisition, debt on review
MXIM 52.61 -0.77 -1.54 Working very well, break coming
VRSN 21.58 -2.04 -0.91 On its way to multi-year lows
EBAY 54.39 -0.71 -1.25 Coiling around $54, breakdown ahead
NVDA 35.60 0.19 -1.50 The big seller is back, watch $35
BGEN 41.54 -1.59 -0.36 Dropped, earnings, worked well!!!
ADI 39.69 -0.45 -1.36 New, broken chip play with the SOX
PLCM 19.97 -1.59 -1.58 New, on the way to single digits??
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PLAY UPDATES - CALLS
********************
TKTX $41.40 -0.45 (+0.52) TKTX experienced a volatile session
yesterday when the stock traded between the $40 and $42 levels.
It finally broke out above the $42 level, reaching as high as
$42.39 yesterday, before pulling back a bit. The stock
quickly rebounded in today's session to move slightly back
above the $42 mark intraday. The building relative strength is
very impressive, and we're encouraged by the way that TKTX is
trading higher without the support of the Biotechnology Sector
Index (BTK.X). The BTK.X slipped lower again today, so we'd
expect the first sign of strength in the index to push TKTX
up to its relative highs between the $44 and $46 mark. Traders
looking for new entries can use strength in the BTK.X to confirm
new positions at current levels. Look for buyers to emerge at
the 10-dma on any intraday weakness as an entry opportunity on
pullbacks.
PNRA $68.61 +1.61 (+1.87) PNRA rebounded sharply early this week
after its pullback and sideways trading during last week's action.
The stock traded above its 10-dma in yesterday's session, then
continued higher in today's session despite the weakness in the
broader markets. The return of this stock's bid in the face of
broader weakness is encouraging, and it might reveal that the
defensive momentum buyers are back to carry this one higher.
We'll be looking for a breakout above the $70 level from here
as a sign that the bulls are back in control. Traders who took
entries on last week's dip can use a trade up to the $70 to
exit partial positions for a short term gain, and tighten stops
on remaining positions. Of course a breakout above the $70 level
can be used as an entry point into new plays, but traders using
that strategy should look to take quick profits in a momentum
trade type of set-up. Intraday weakness later this week down
into the $67 to $68 support level can be used as an entry
ahead of a potential breakout above $70.
AET $43.45 -1.06 (-0.97) Salomon Smith Barney came out yesterday
morning with an upgrade on AET to a buy from an outperform
rating. The firm's upgrade was based upon the favorable cost
trends. The upgrade ahead of AET's earnings report later this
week was peculiar, but it was welcome nonetheless, because it
caused a spike higher during intraday trading yesterday. The
stock traded as high as $45.36 during yesterday's session, which
could have offered momentum players who took entries last week a
quick exit point for short term gains. The stock slid back from
that intraday peak, however, and continued lower in today's
session. The two day pullback so far this week is normal, and
most likely a result of profit taking. The broader health care
group has pulled back in addition, making AET's weakness sector
related. We have only one more day to play this stock, as the
company reports before the bell Thursday. Traders will want to
be out of positions by the close tomorrow, to protect against any
earnings related pullback, although the company is expected to
report a bullish earnings report. Nevertheless, look to exit
plays on strength during tomorrow's session as buyers anticipate
a solid earnings report.
HI $61.80 +0.90 (-0.64) HI continued above the $62 mark in
yesterday's session, but reversed as the day wore on. It
appeared that profit takers were to blame for yesterday's
weakness, as volume was relatively light on the way back down.
But the stock snapped back in today's session to buck the
weakness in the broader market. The financial segment of the
market was relatively weak in today's session, so it was
impressive to see HI buck the weakness in the broader sector to
trade higher during the day. We'll be looking for a move back
above the $62 level this week to confirm that HI's breakout
is for real, and that the stock is heading higher over the
short term. From there, we'll look for a trade up to the $64
level as a potential exit point for short term positions.
On further intraday weakness, use dips down to the $60 to
$61 area in the coming days as entry points. But make sure
that the stock rebounds before trying to catch a falling
knife.
ACDO $61.97 -0.32 (-0.81) Following its stellar run up the
charts last week, the Health Care index (HMO.X) has been taking
a bit of a breather so far this week and appears likely to finish
filling the gap left last Friday. ACDO is actually holding up
fairly well this week, following its own breakout on Friday. The
stock is consolidating near $61.90, just above support at
$61.50-61.75, with the month-long ascending trendline at $61.25.
Then stronger support resides at the $59.50 level (also . So long
as the uptrend holds (series of higher lows) and the HMO index
retains its strength relative to the broad market, look to
initiate new positions on a dip and bounce from support, with an
eye towards a breakout over last week's highs. Earnings from the
Health Care sector continue to impress investors and expectations
of the same from ACDO should continue to fuel the stock's climb
up the chart. ACDO's earnings are due out next Monday. Raise
stops to $58.50.
AZO $75.14 +0.40 (+0.56) There hasn't been much excitement seen
by shares of AZO this week, and in light of the carnage in the
broad market, that is definitely good news. Rather than weaken
with the rest of the market, AZO seems to have found support near
the $74 level and is inching its way back towards last week's
highs at the $76 level. The Retail sector (RLX.X) is trying to
firm near the $940 support level (prior resistance) and if
successful, should help to propel AZO through resistance. Use a
bounce from the $74 level or even as low as $73.50 (the bottom
of Thursday's gap) to initiate new positions. Otherwise, wait
for a rally through the $76 level before playing.
**************
NEW CALL PLAYS
**************
None
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*******************
PLAY UPDATES - PUTS
*******************
JDEC $11.90 +0.06 (-0.36) JDEC gapped lower in yesterday's
session on the weakness in the broader technology sector, but
traded fractionally higher today despite the continued selling
in the Software Sector Index (GSO.X). On a shorter time frame
chart, JDEC appears to be consolidating its recent leg lower.
It's difficult to say how long the consolidation will last,
but judging by the pattern of relatively lower highs on
intraday short covering rallies, the stock could be poised to
breakdown this week. Whether it actually does depends on the
direction of the GSO.X. That said, watch for further weakness
in the sector to pave the way for a breakdown. Momentum
traders can look for a break below the $11.25 level, thereafter
confirming the decline with a move below the $10.50 mark.
Intraday traders can game rollovers from the $12 mark for
entry points ahead of a potential breakdown.
MU $29.39 -1.51 (-0.11) After much speculation, the long
awaited Micron purchase of Hynix assets was announced yesterday.
Bulls used the news to carry the stock higher in yesterday's
session, continuing to buy into today's session. But the
early intraday strength today proved nothing more than an
excellent entry point opportunity. The stock rolled over right
near its descending 200-dma, just below the site of the stock's
gap lower and our stop at the $32 level. The intraday reversal
was big, spurred by comments from S&P stating that they were
reviewing MU's credit position after the purchase of Hynix's
core assets. The news could snowball later this week, which
is why we're looking for the breakdown below the $28 level to
take place in the coming days. Additionally, the Semiconductor
Sector Index (SOX.X) traded poorly today, lending to the weakness
in MU. Look for further selling of chip issues to pressure MU
below its breakdown point.
EBAY $52.43 -1.25 (-1.96) Following EBAY's wild gyrations in the
wake of its earnings report last Thursday, the stock gave us a
textbook entry with a rally to resistance at $55 (also the site
of the declining 20-dma) before obediently rolling over. Since
then, the bears have turned back each attempted rally at the
20-dma (currently $54.43) as the stock has continued down towards
the $52 support level. In fact that the $52.40 level seems to be
consistently attracting buying interest. So we have a couple
ways in which we can play. Either fade the next rally, initiating
new positions on a rollover from the 20-dma or possibly $55
resistance, or wait for a breakdown below the $52 level. Just
keep in mind that there will also be some buying support seen near
the $51-51.50 level, so the best course of action for momentum
traders may be to wait for the $50.50 level to give way before
playing. We are keeping our stop in place at $56 until support
gives way.
MXIM $52.61 -1.54 (-2.31) Weakness in the Semiconductor sector
(SOX.X) has been hammering shares of MXIM lower again this week.
The sharp drop in the stock on Monday found buyers waiting near
the $53 level and it was able to recover in the afternoon. But
the story wasn't quite as rosy on Tuesday, as selling drove the
stock as low as $52.35 towards the end of the day before
recovering to close above the critical $52.50 support level.
With the heavy selling volume in the stock and the technical
breakdown in the SOX today, it looks like MXIM will finally
violate this support level ahead of its earnings release next
Tuesday. An oversold bounce tomorrow is definitely possible in
the wake of a series of positive earnings reports tonight. Use
that bounce to initiate new positions on a rollover from the
$54.00-54.50 resistance area. Should that bounce fail to
materialize, consider new positions on a collapse below the $52
level. Lower stops to $55.25.
NVDA $35.60 -1.50 (-1.32) The bears are persistently driving
shares of NVDA to new 6-month lows, and the declining trendline
(currently $37.25) continues to be a high-odds entry point for
new positions. The modest short-covering rally on Monday
afternoon turned to dust shortly after the opening bell today
and NVDA declined to close below the $36 level for the first
time since early October. Investors who have been watching the
Semiconductor index (SOX.X) this week shouldn't be surprised, as
the SOX broke below its ascending trendline on Tuesday and
appears destined to at least challenge the 200-dma at $538. The
poor Xbox results announced by MSFT in its earnings report last
week are clearly weighing on NVDA along with the overall sector
weakness. The action plan is simple; enter new positions on
failed rallies near resistance, first at $36.50, then the
descending trendline and finally $37.75. We are lowering our
stop tonight to $38.50, just above the bottom of last Friday's
gap. Momentum traders can initiate new positions on a drop
below the $35 level (if accompanied by continued weakness in the
SOX), but keep an eye on potential support in the $33.50-34.00
area, where we could see the next oversold bounce.
VRSN $21.58 -0.91 (-2.95) Only one more day to go on this
short-term play, but so far VRSN is performing beautifully.
After crashing through the $23 support level on Monday, the
stock bounced up to that level today before rolling over and
falling below $22 to close out the day near the session's lows.
VRSN is set to announce earnings tomorrow after the closing bell
and rumors are surfacing that the company will announce that
enterprise sales are soft, leading to more layoffs. Whether
founded on facts or not, it is clear that investors aren't
sticking around to find out. The intraday low of $21.40 was the
lowest level seen since the first quarter of 1999 and a breakdown
below $20 could be ugly indeed. With the proximity of earnings,
be very careful about initiating new positions. A better
approach will be to use any further weakness tomorrow to lock in
your gains and clear the decks for the next play. We are
tightening our stop tonight to the $23 level. Regardless of how
tomorrow's action shakes out, we'll be dropping VRSN from the
playlist tomorrow night.
*************
NEW PUT PLAYS
*************
ADI - Analog Devices $39.69 -1.36 (-1.81 this week)
Analog Devices, Inc. is engaged in the design, manufacture and
marketing of high-performance analog, mixed-signal and digital
signal processing integrated circuits (ICs) used in signal
processing applications. The Company produces a wide range of
products that meet the technology needs of a broad base of
customers and markets. Markets and applications for the
Company's products include communications, computers and
computer peripherals, consumer electronics, industrial,
instrumentation, military and space systems and automotive
electronics.
Since rolling over just above the 600 level, the Semiconductor
Sector Index (SOX.X) has slid for the last four days. The
sector was off by 3% in today's trading despite the seemingly
good news from the book to bill ratio. The failure of buyers
to carry the SOX.X higher during its most recent breakout
attempt combined with the building weakness could result in a
major breakdown this week. The SOX.X has found support near
the 550 level in recent weeks. That level is reinforced by
the 200-dma just below near 540. A breakdown below 550,
confirmed by a drop below the 200-dma, would open the gates
for further selling in the SOX. We're turning to ADI as a
way to capitalize on a potential breakdown in the SOX. The
stock tracks its sector very closely, making it a natural way
to play the sector. Furthermore, with earnings set for
release in mid-May, a warning in the coming weeks is not out
of the question for this company, especially because of its
exposure to the networking business. ADI has lost some
relative strength over the last few sessions, signaled by the
breakdown below the $40 level today. Bears can look to enter
put plays at current levels early tomorrow so long as the
SOX is weak. On a short covering rally, look for a rollover
near the $42 level. Our stop is just above at $42.50. To
the downside, target February's lows near the $37 mark. Below
that, we'll look for a move into the mid to low $30s.
BUY PUT MAY-40*ADI-QG OI=1187 at $2.35 SL=1.25
BUY PUT MAY-35 ADO-QG OI= 306 at $0.70 SL=0.25
Average Daily Volume = 2.84 mln
PLCM - Polycom, Inc. $19.97 -1.58 (-3.17 this week)
Polycom manufactures and markets a full range of high quality,
media-rich communications tools and network solutions, which
enable business users to immediately realize the benefits of
video, voice and data over rapidly growing converged networks.
Although the company is primarily a video conferencing and
voice conferencing product provider, it has recently entered
the DSL access market, particularly in the area of integrated
voice appliances and broadband access devices.
Even beating the street estimates for earnings doesn't buy you
much in terms of investor loyalty these days. With the broad
market continuing to weaken, even companies that have just
reported solid earnings are being sold unmercifully. PLCM beat
the consensus estimates by 2 cents on strong revenue last
Wednesday and since then the chart has been persistently red.
In just the past 4 days, the stock has lost nearly 19% of its
value and volume is on the rise. Tuesday's breakdown below the
$21 support level (that has held since late February) does not
bode well. Looking at the PnF chart, we can see that today's
drop produced a descending triple-bottom breakdown, giving a
bearish price target of $17. The interesting thing about that
target is that (if achieved) it will come after the stock has
broken long-standing support at the $18 level and that breakdown
could usher in a new wave of selling, causing the stock to exceed
its target on the downside. At any rate, the bears are
definitely on the offensive here and we're happy to go along for
the ride. An oversold rebound near the $21.50-22.00 level would
make for a solid bearish entry point, but we may not get that
lucky. If the downward slide continues, look to open new
positions on a drop below the $19.75 level. We are initiating
the play with our stop set at $22.50.
BUY PUT MAY-22 QHD-QX OI= 301 at $3.40 SL=1.75
BUY PUT MAY-20*QHD-QD OI=1076 at $1.75 SL=0.75
Average Daily Volume = 3.47 mln
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DISCLAIMER
**********
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Contact Support

The Option Investor Newsletter Tuesday 04-23-2002
Copyright 2001, All rights reserved. 3 of 3
Redistribution in any form strictly prohibited.
*********************
PLAY OF THE DAY - PUT
*********************
MU - Micron $29.39 -1.51 (-0.11 this week)
Micron Technology, Inc. and its subsidiaries are principally
engaged in the design, development, manufacturing and marketing
of semiconductor memory products. The Company offers products
that include dynamic random access memory, synchronous dynamic
random access memory, double data rate dynamic access memory,
legacy dynamic random access memory products, static random
access memory products and Flash products.
Most Recent Update
After much speculation, the long awaited Micron purchase of
Hynix assets was announced yesterday. Bulls used the news to
carry the stock higher in yesterday's session, continuing to
buy into today's session. But the early intraday strength today
proved nothing more than an excellent entry point opportunity.
The stock rolled over right near its descending 200-dma, just
below the site of the stock's gap lower and our stop at the $32
level. The intraday reversal was big, spurred by comments from
S&P stating that they were reviewing MU's credit position after
the purchase of Hynix's core assets. The news could snowball
later this week, which is why we're looking for the breakdown
below the $28 level to take place in the coming days.
Additionally, the Semiconductor Sector Index (SOX.X) traded
poorly today, lending to the weakness in MU. Look for further
selling of chip issues to pressure MU below its breakdown point.
Comments
MU's rollover following the news development reinforced the
inherent weakness at play in the stock. In other words, the
sellers remain well in control of MU over the short term. A
major earnings disappointment, warning, or technical breakdown
in the SOX.X should lead to a high profile breakdown in MU.
Look for the stock to lose the $28 support level this week,
which can be used as a momentum based entry point into new
positions. A quick trip down to $25 seems likely if we get
the breakdown below $28.
BUY PUT MAY-32 MU-QS OI= 6913 at $3.90 SL=2.00
BUY PUT MAY-30*MU-QF OI=16105 at $2.20 SL=1.25
Average Daily Volume = 8.07 mln
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**************
TRADERS CORNER
**************
Friendly Trends
Austin Passamonte
Like it or not, the trend is decidedly your friend. That goes
doubly true for option players in the month of April where action
may not have always been easy but sure is lucrative for trend
traders.
Those who know me realize I prefer to trade the S&P indexes
almost exclusively, but like you I’m able to handle just about
any symbol one can paste on a chart. That being said, let’s
cruise some technology charts and see where the money lies behind
us, tomorrow and beyond. Most importantly we need to know HOW TO
identify where the money is headed most of the time.
(60/30 Minute Chart: QQQ)
QQQs have given us some beautiful stochastic sell signals
practically all month long. These charts also flashed some buy
signals but savvy technicians knew enough to sift them out. Why?
Very simple: stochastic values and all oscillators work great in
a sideways market or to generate entry signals with a trend if
one prevails. Oscillators are notorious for flashing false entry
signals against the trend that turn out to be nothing more than
bull or bear traps.
In this 60/30 minute chart applet depicted above, we see where
three screaming sell signals were given as price action met
resistance at these custom channels and stochastic values rolled
over. Intraday traders mopped up some nice gains and holding over
the close would have worked well too. The oversold signals were
duds, or at the most suited for intraday plays only. Why is this
and how do we know? The trend is indeed our friend.
(Weekly/Daily Chart: QQQ)
One must never trade off a single time frame series of charts.
Multiple looks are pertinent for success. I have long used weekly
and daily charts articulated with stochastic and Fibonacci values
to monitor key pivot points and price direction. Can we clearly
see where weekly charts have been in bearish mode since late
March... about the time that Eric & Jeff noted the point & figure
charts began flashing sell signals? Each method, bar or P&F
charts will give the trader same entry & exit points at the same
time. Use one or the other, whatever works for you.
This is why we’ve rode the southbound waves to success in
technology all month long. If the NDX was clearly this bearish,
so too would be the SOX and most of these index/sector
components. Right or right? Doesn’t matter if we only trade
single stocks or their options instead of QQQs... our results
would be the same. Take a peek thru the NDX components list and
tell me how many of them made decent shorts in the past four
weeks. I already know the answer, and suppose you probably do
too!
(Weekly Chart: WCOM)
Lest you think this may be an individual thing, WCOM traded more
than 250 million shares EACH DAY this week! That is five hundred
million shares of volume puked out by huge mutual funds far, far,
far below their cost basis. Are you and your retirement money
still invested in these absolute moronic mutual funds? I sure
hope & pray not, because they still don’t have a clue and will
wash out plenty more individual investors before the bubble
totally deflates, which it certainly has not.
You & I hear those talking head analysts on CNBC trying to
justify (using $20 words) why they kept a strong by on this
complete slob of a stock all the way down until now. An average,
run of the mill individual trader can merely pop up a weekly
chart like this, check the trend and follow stochastic values all
the way. Sell the bejabbers out of WCOM every time it gets
overbought against the crystal-clear trend and rake our dough.
Let me assure you of one thing: the odds are extremely high for
MSFT, IBM, INTC, CSCO and others to warn again the next quarter
or three ahead. While none of them are bankruptcy candidates like
WCOM surely is, they will trade far lower than current prices if
weak (or total lack of) earnings prevail ahead. Hundreds of other
stocks remain vulnerable to decimation just like WCOM, one of the
“four horsemen” of the NDX. Those horses are broken down now, and
don’t be shocked if QCOM is crawling on two legs in the teens
soon, too.
Our roadmap to wealth, capital defense or capital devastation
lies clearly & plainly in these weekly, daily, hourly and thirty-
minute charts. Option traders can and will get rich playing the
trend this year and every year to come. Option traders will bust
out broke and forlorn in a hurry this year and every year hence
who insist on bucking the trend. It’s been that way since trading
began and will not change in our lifetimes. The trend is your
friend to honor & trust: play in harmony with it and let time
take over for wealth creation from there.
Best Trading Wishes,
Austin Passamonte
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************
MARKET WATCH
************
A few candidates were recently triggered, and a few are sitting
near action points. Here's two more ideas worth a look.
To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/042302.asp
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MARKET POSTURE
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Some movement has taken place in the last two days. But with the
major averages precariously propped above support, we could see a
lot more movement later this week.
To Read The Rest of The OptionInvestor.com Market Posture Click Here
http://www.OptionInvestor.com/marketposture/042302_1.asp
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DISCLAIMER
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